Due diligence in Brazil. Beware: The Lion sleeps but does not forget.

Last week,  a ChinaLaw post about the peculiarities of due diligence in China got me thinking. We sure have our own idiosyncrasies in Brazil, too.

The thing is, whatever deal you have with the seller, chances are you are the one that will primarily answer for the taxes left behind for the company you are purchasing.

Like in many countries, the private agreement between the foreign investor and the Brazilian seller is not opposable to the Treasury. The private deal you have will only grant you the right to seek out repayment in court, what may take, literally, decades (that is why I always recommend arbitration. The Brazilian courts are too slow).

To add some sense of urgency, one can note that not only the assets you are purchasing are subject to be taken by the Treasury, but, since the Piercing of the corporate veil has become commonplace in Brazil,  other assets of the shareholders can and will be sought after, if necessary. This means that a company’s account at an American Bank or the beautiful houses the investor may have in Sicily may end up at the hands of the Brazilian Treasury, in order to satisfy tax debts.

To prevent all that, it is important the way you do your diligence. If you simply look for the registered tax debts and other books, you may have an unpleasant surprise down the road.

In Brazil most of the taxes calculations are made by the taxpayer himself and the Treasury has, usually, up to five years to check them over.

That means you need to check and double check the way the taxes were calculated and make sure it has been done right. Otherwise, the great bargain you see now may become a nightmare someday.

So, call a lawyer and do your Due Diligence with extra diligence. There is plenty of money to be made in Brazil, but not for the naïve investors.

We call our Revenue Service The Lion for a reason.